Value chain analysis Ethiopia leather products

Structural transformation and export diversification into higher value-added products and away from primary commodities remain major development objectives for low-income countries (LICs). Sectors such as apparel or leather products have traditionally been gateways to export diversification for LICs and  are  generally  regarded  as  first  steps for developing countries embarking on an export-oriented industrialization process. Given their rather low entry barriers (low fixed costs and relatively simple technology) and labor- intensive nature, the sectors can absorb large numbers of unskilled workers and provide upgrading opportunities into higher value added activities within and across sectors. However, the defining characteristics of these sectors also mean that they are very competitive, leaving many suppliers with limited leverage and challenges in ensuring social and environmental compliance and longer term development benefits.

In Ethiopia, the objective to transform from the still dominant agricultural sector to the industrial sector is paramount in policies. Agricultural development led industrialization (ADLI) was promoted as the main guiding principle of Ethiopia’s development process and the leather and leather products (LLP) sector was identified as one of the main priority sectors. Ethiopia has adopted an active, state driven industrial policy aimed at  linking  the LLP sector to global value chains (GVCs).

The LLP GVC represents a classic example of a buyer-driven value chain which is characterized by decentralized, globally dispersed production networks, coordinated by lead firms, which control activities that add “value” to products (e.g., design, branding), but often outsource all or most of the manufacturing process to a global network of suppliers. Similar to other industries, the LLP GVC has experienced important geographical and organizational shifts in the last few decades. These shifts entailed further participation of developing and emerging economies in the transformative stages of the industry, beyond the supply of hides and skins for manufacturing in the advanced economies, and are reflected in increasing global trade values over time. China, in particular, has emerged as a key location for the manufacturing of leather products.

In addition to the long-term trade growth due to geographical and organizational shifts in the LLP GVC, three further major trade trends can be identified in the last decade. First, LLP trade growth by value has slowed down since 2009, with the important exception of leather bags. Second, global trade of LLP by value has decreased since 2014 due to falling retail prices and a shift in consumption patterns in key markets, in particular a trend towards the use of synthetic materials. It remains to be seen whether or not this trend will continue in the near future. Third, China’s market share in key consumption markets has been decreasing in the last few years.

The EU remains an important player in the global leather trade as both an importer and an exporter of LLP. The LLP industry has, however, experienced significant changes over the last few decades. Similar to apparel, a growing percentage of leather products consumption is now met through imports. The dynamics of EU imports were similar to global trends, with increasing imports in the last two decades, a slowdown since 2009 and – depending on the product – partially negative growth rates since 2014. China enjoys a dominant position in many market segments in the EU, but its share is decreasing. A number of EU countries maintain relatively large leather manufacturing sectors, in particular Italy, which managed to build a very strong position in the high-value added luxury segment of the market.